Fitch Warns It Will Downgrade U.S. Credit Rating If No Budget Deal in 2013

Fitch Warns of U.S. Downgrade If No Budget Deal in 2013

November 29, 2011

Reuters - Fitch Ratings gave the United States until 2013 to come up with a "credible plan" to tackle its ballooning budget deficit or risk a downgrade of the country's coveted AAA rating.

The ratings agency on Monday revised to negative from stable the outlook on the U.S. credit rating after a special congressional committee failed last week to agree on at least $1.2 trillion in deficit-reduction measures.

The committee failure made it unlikely that any meaningful deficit plan will be adopted next year, increasing the fiscal burden on the next administration that will be elected in late 2012, Fitch said.

"The negative outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. AAA sovereign rating will be forthcoming," the ratings agency said in a statement, adding that the chance of a downgrade is "slightly greater than 50 percent" now.

The news had little market impact, as a negative outlook from Fitch was widely expected.

"What it shows is that Fitch is putting the U.S. on warning that this cannot go on forever," said Michael Yoshikami, chief investment strategist at YCMNET Advisors in Walnut Creek, California.

"The markets already assumed this was going to happen. It would be different if it was a downgrade but a negative outlook is not the end of the world."

Like Moody's Investors Service, which also has a negative outlook on the U.S. Aaa rating, Fitch does not expect meaningful deficit-reduction measures in 2012, when presidential elections should exacerbate political divisions in Washington.

Rival agency Standard & Poor's cut the U.S. rating to AA-plus in an unprecedented decision on August 5, citing concerns about the government's budget deficit and rising debt burden. It maintains a negative outlook on the credit.

KICKING THE CAN

The so-called "Super Committee" of six Democrats and six Republicans was seen by Fitch as the last chance of an agreement before elections.

Last week, however, its members announced they were unable to agree on a deficit reduction plan, setting in motion automatic cuts worth $1.2 trillion over 10 years. The cuts are designed to be split evenly between domestic and military programs.

Both S&P and Moody's said on November 21 the committee's failure would have no immediate impact on their ratings.

However, Moody's on November 23 warned the United States that its rating could be in jeopardy if lawmakers backtrack on the automatic cuts of $1.2 trillion due to take effect starting in 2013.

In a statement issued after Fitch's decision, the U.S. Treasury said "Fitch's action is a reminder of the need for Congress to reduce the country's long-term deficit in a balanced manner and to avoid efforts that would undo the $1.2 trillion in automatic cuts negotiated last summer."

Fitch is now willing to give the new government that will take office in January 2013 several months to come up with a "sound" deficit reduction plan, top credit analyst David Riley told Reuters in an interview.

"Once we move to the second half (of 2013) and it looks as if a deal can't be done, then the (negative) outlook would likely result in a downgrade," Riley said.

Until then, there is little change of a "material adverse shock" that would trigger an early downgrade of the U.S. rating, he said, playing down concerns about the economic impact of the euro-zone debt crisis.

"If we had a relatively short downturn because, for example, the crisis in Europe got much worse and there was a spillover effect to the U.S. but we thought that it ultimately would prove to be temporary for the U.S. ... then that wouldn't necessarily lead us to change the rating."